Anand Rathi has a buy call on Karnataka Bank, target price Rs 60

Anand Rathi has given a buy rating to Karnataka Bank with a revised target price of Rs 60 (Rs 95 earlier). The share price moved down by -1.20 per cent from its previous close of Rs 41.50. The last traded stock price is Rs 41.

Higher opex and credit cost led to a sharp decline in Karnataka Bank’s earnings. Asset quality and PCR improved. A greater build-up of stress would keep credit cost high and profitability subdued in the medium term. The brokerage has cut its P/ABV multiple to 0.3 times (earlier 0.4 times).

Investment Rationale

With an expected higher delinquency rate in H2 FY21, the brokerage expects credit cost to be high in the medium term. Higher credit costs combined with weaker operating performance (attributed to slower business growth) would keep the bank’s earnings weak in FY21. The brokerage estimates a 0.2 per cent RoA for FY21 and 0.7 per cent for FY22.

The brokerage’s June 2021 target (of Rs 60) is based on the two-stage dividend discount model (DDM)l. This implies a ~0.3 times P/ABV multiple on its FY22e book.

Risks: High provisioning, large slippages from its agriculture and MSME books.

Financials

For the quarter ended March 31, 2020, the company reported standalone interest income of Rs 1316.56 crore, up 3.56 per cent from last quarter Interest Income of Rs 1271.28 crore and up 7.48 per cent from last year same quarter Interest Income of Rs 1224.91 crore. The bank has reported net profit after tax of Rs 27.31 crore in the latest quarter.

Promoter/FII Holdings

FIIs held 12.80 per cent stake in the company as of March 31, 2020, while DIIs held 10.65 per cent, DIIs 16.67 per cent and public and others 76.55 per cent.